Overbought

Overbought describes a market condition in which an asset's price has risen markedly within a relatively short period, suggesting that current buying pressure may be excessive. In technical analysis, overbought is a qualitative assessment rather than a precise price level. It is commonly signaled by momentum indicators such as the relative strength index (RSI) when readings exceed 70, or by oscillators like the stochastic oscillator when values rise above 80. Some traders also interpret sustained price action above key moving averages as a sign of overbought momentum.

Interpretation of overbought signals depends on context, including the asset, time frame, and prevailing trend. An overbought condition can indicate a potential pullback, consolidation, or reversal, but it does not guarantee one. Markets can remain overbought during strong uptrends, and fundamental factors or shifting sentiment can prolong moves beyond typical expectations.

Practical use involves risk management and confirmation. Traders may reduce exposure, take profits, or tighten stop-loss levels when indicators show overbought readings, ideally in conjunction with price action, volume, and other indicators. The main limitation is the risk of false signals and whipsaws, especially in trending markets where prices can remain elevated for extended periods. Because different periods, assets, and market regimes yield different thresholds, overbought should be interpreted with caution and as one input within a broader analysis. Overbought is often discussed alongside oversold as part of the broader concept of momentum-driven extremes.